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The World Economy Is Off Balance Due to War and Inflation

The economy all around the world is having trouble, due to inflation, energy problems, and now Russia's nuclear threats.

September 23, 2022
13 minutes
minute read

The economy all around the world is having trouble, due to inflation, energy problems, and now Russia's nuclear threats.

According to business surveys published on Friday, economic activity in Europe declined sharply in September. This raises the risk of recession in one of the world’s industrial powerhouses as governments grapple with surging prices and disruptions from Moscow’s attack on Ukraine.

S&P Global data showed that the economic slowdown in Germany was particularly severe, due to the country's close ties to the rest of Europe and its dependence on gas imports.

The eurozone's composite purchasing managers index fell to 48.2 in September, a 20-month low, according to data firm IHS Markit. A reading below 50 indicates a contraction, and the September reading suggests a deepening economic downturn that is likely to gather further momentum in coming months, IHS Markit said.

According to Chris Williamson, chief business economist at S&P Global Market Intelligence, a recession in the eurozone is looking increasingly likely as companies report worsening business conditions and intensifying price pressures linked to soaring energy costs.

Germany's economy is deteriorating at a rate not seen outside of the pandemic since the 2008 global financial crisis, according to Mr. Williamson. This is a worrying trend that could have serious implications for the country's future.

Trade volumes are declining and inflation is eroding confidence in households and businesses around the world. China's housing market is weakening while Europe's energy crisis is weighing on factory output.

This week, Russian President Vladimir Putin threatened nuclear strikes and ordered reservists to mobilize after his troops suffered stinging setbacks in Ukraine. This suggests that Europe's most significant conflict since World War II could either drag on or escalate dramatically.

Central banks are focusing on fighting inflation, with the Federal Reserve increasing interest rates at a faster pace than we've seen in recent years. This is causing the value of the dollar to rise against other currencies, which in turn is leading to imported inflation and putting pressure on emerging markets that have borrowed in dollars.

Jens Magnusson, chief economist at SEB, a Sweden-based bank, said that raising interest rates quickly and forcefully is an experiment, and it's not clear how much damage it will do to the real economy.

Some supply bottlenecks are easing and unemployment remains low across advanced economies. Households in these countries have dipped into savings amassed during the pandemic, with their spending increasing by an annual rate of 2.4% in the six months through June, according to analysts at J.P. Morgan. Global employment also rose at more than twice its prepandemic pace during the period, the analysts said.

In the United States, consumer spending remains strong and some manufacturers are shifting production from overseas, boosting investment. However, the housing market is softening as mortgage rates rise. Federal Reserve officials on Wednesday lowered their median expectations for economic growth from 1.7% to 0.2% this year.
In order to cool inflation in the United States, it is likely that unemployment will need to rise and growth will need to be sustained at a lower level, Federal Reserve Chair Jerome Powell told reporters on Wednesday. "We will keep at it until we are confident the job is done," Mr. Powell said.

Retail sales in the eurozone have declined in recent weeks, with consumer sentiment hitting its lowest level since records began in 1985. Industrial output in the region shrank by 2.4% in July from a year earlier, as runaway energy costs strangled manufacturers. Deutsche Bank estimates that the region's economy could shrink by 2.2% next year, led by a 3.5% contraction in Germany.

According to Phil Smith, a director at S&P Global, the German economy is on track to contract in the third quarter, and things are not looking good for the fourth quarter either. Friday's surveys showed a deepening decline in German business activity in September, with the service sector leading the way. This is due to customers cutting back on spending due to tighter budgets and increased uncertainty about the future.

More than half of German retailers believe that high energy costs are a threat to their business, according to a survey by the German Retail Association. In the country's large auto sector, one in ten companies have already cut production due to high energy costs, and another third are considering doing so, according to a survey by the German Association of the Automotive Industry. Nearly a quarter of companies in the sector are considering shifting investments abroad. "The situation is becoming increasingly dire for medium-sized companies in the automotive industry," said Hildegard Müller, the president of the association.

Kion Group AG, a German forklift manufacturer, warned this month that incoming orders would be significantly below last year’s level in the three months through September. The company predicted a loss of between €100 million and €140 million, equivalent to $98 million to $138 million.

Retailer John Lewis & Partners has reported a loss of £99 million for the first half of its trading year in the U.K. The company has warned that customers are cutting back on spending.

Analysts are becoming more optimistic that the region will have enough gas for the winter, as long as the weather isn't too cold. The region's governments have invested over €500 billion to support households and businesses through the energy crisis, according to calculations by Bruegel, a Brussels think tank.

Export growth in Asia is weakening, as demand for electronics falls in Western markets. This is a sign that consumer demand is slowing down in the region's major trading economies.

Alex Holmes, senior Asia economist at Oxford Economics in Singapore, believes that there are signs that the economy is beginning to improve.
South Korea's exports declined by 8.7% in the first 20 days of September, led by cars and telecommunications equipment. Annual growth in semiconductor exports recovered after falling in August, but remains well below the gains seen earlier in the year.

Samsung Electronics Co. has said that it expects the current slump in chip sales to continue into 2023. The semiconductor industry has been hit hard by declining sales of personal computers, smartphones, and data servers around the world.

Kyung Kye-hyun, who heads Samsung's semiconductors unit and serves as the company's co-CEO, told reporters earlier this month that the second half of this year looks bad and that next year doesn't really seem to show a clear momentum for much improvement.

Taiwan's exports grew at the slowest pace in more than two years in August, while China's exports also declined sharply last month. This has led to concerns about the state of the economy, which is already facing a slowdown in the property market and Beijing's strict policy on Covid-19.

Nina Lin, sales manager of Tombo Toys Co., said that the company has received fewer orders in the second half of this year compared to the previous year. Tombo Toys is a Guangdong-based toy maker that mainly exports to the U.S., Eastern Europe and South America.

Chinese export growth in August slowed to an annual 7.1%, compared with 18% growth a month earlier. Exports to the European Union grew by an annual 11.1% in August, roughly half the rate in July, while shipments to the U.S. contracted by an annual 3.8%, data from China’s customs authority showed.The slowdown in Chinese export growth in August was due to weaker demand from the European Union and the United States. Exports to the EU grew by 11.1% in August, compared with 22% growth in July. Shipments to the US contracted by 3.8% in August.

Central banks in Asia are following the lead of their counterparts in the U.S. and Europe by raising interest rates. On Thursday, central banks in the Philippines, Taiwan and Indonesia raised borrowing costs, citing inflationary pressures.

The two biggest exceptions are China and Japan, who have less pressure from inflation and are instead battling soft growth. The Bank of Japan held its policy settings steady Thursday, signaling that it doesn't think Japan is climbing out of the deflationary trap it has been mired in for years.

According to recent data, China's economic slowdown has moderated somewhat in August, thanks to increased infrastructure investment offsetting weak consumer spending and continued declines in housing prices. Although there have been some Covid-19 outbreaks in major cities like Beijing and Shenzhen, these have not resulted in sustained lockdowns; however, a number of smaller cities are still under tight restrictions.

Goldman Sachs economists have lowered their forecast for Chinese economic growth next year, citing expectations that the country will not significantly change its Covid strategy until the second quarter. They now expect growth of only 4.5% in 2021, down from 5.3% previously. For this year, they expect growth of only 3%.

Jerome Haegeli, group chief economist at reinsurer Swiss Re, has said that the global economy is in the emergency room and that a soft landing is wishful thinking. Haegeli is a former official at Switzerland's central bank.

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